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Earnings Release: Here's Why Analysts Cut Their Reed's, Inc. Price Target To US$3.50

Simply Wall St

Investors in Reed's, Inc. (NASDAQ:REED) had a good week, as its shares rose 2.2% to close at US$0.72 following the release of its third-quarter results. Revenues of US$8.7m came in a modest 3.3% below forecasts. Losses were a relative bright spot though, with a per-share loss of US$0.14 coming in a substantial 27% smaller than what analysts had expected. Earnings are an important time for investors, as they can track a company's performance, look at what top analysts are forecasting for next year, and see if there's been a change in sentiment towards the company. Readers will be glad to know we've aggregated the latest forecasts to see whether analysts have changed their mind on Reed's after the latest results.

Check out our latest analysis for Reed's

NasdaqCM:REED Past and Future Earnings, November 15th 2019

Taking into account the latest results, the latest consensus from Reed's's three analysts is for revenues of US$40.9m in 2020, which would reflect a meaningful 13% improvement in sales compared to the last 12 months. Per-share losses are expected to explode, reaching US$0.23 per share. Before this earnings announcement, analysts had been forecasting revenues of US$43.1m and losses of US$0.28 per share in 2020. While revenue forecasts have been revised downwards, analysts look to have become more optimistic on the company's earnings power, given the substantial gain in to earnings per share forecasts.

Analysts have cut their price target 26% to US$3.50 per share, suggesting that the declining revenue was a more crucial indicator than the forecast reduction in losses. There's another way to think about price targets though, and that's to look at the range of price targets put forward by analysts, because a wide range of estimates could suggest a diverse view on possible outcomes for the business. The most optimistic Reed's analyst has a price target of US$6.00 per share, while the most pessimistic values it at US$2.00. We would probably assign less value to the analyst forecasts in this situation, because such a wide range of estimates could imply that the future of this business is difficult to value accurately. With this in mind, we wouldn't assign too much meaning to the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.

Zooming out to look at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up both against past performance, and against industry growth estimates. For example, we noticed that Reed's's rate of growth is expected to accelerate meaningfully, with revenues forecast to grow at 13%, well above its historical decline of 4.6% a year over the past five years. Compare this against analyst estimates for the wider market, which suggest that (in aggregate) market revenues are expected to grow 4.4% next year. So it looks like Reed's is expected to grow faster than its competitors, at least for a while.

The Bottom Line

The most important thing to note from these estimates is that the consensus increased its forecast losses next year, suggesting all may not be well at Reed's. Unfortunately analysts also downgraded their revenue estimates, although industry data suggests that Reed's's revenues are expected to grow faster than the wider market. Yet - earnings are more important to the intrinsic value of the business. The consensus price target fell measurably, with analysts seemingly not reassured by the latest results, leading to a lower estimate of Reed's's future valuation.

With that in mind, we wouldn't be too quick to come to a conclusion on Reed's. Long-term earnings power is much more important than next year's profits. We have forecasts for Reed's going out to 2020, and you can see them free on our platform here.

It might also be worth considering whether Reed's's debt load is appropriate, using our debt analysis tools on the Simply Wall St platform, here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.